Greetings. Welcome to the Tecnoglass, Inc. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Brad Cray, Investor Relations. Thank you. You may begin.

Thank you for joining us for Tecnoglass' fourth quarter and full year 2023 conference call. A copy of the slide presentation to accompany this call may be obtained in the Investors section of the Tecnoglass website. Our speakers for today's call are Chief Executive Officer, Jose Manuel Daes; Chief Operating Officer, Chris Daes; and Chief Financial Officer, Santiago Giraldo. I'd like to remind everyone that matters discussed in this call, except for historical information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future financial performance, future growth, and future acquisitions. These statements are based on Tecnoglass' current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may differ in a material nature from those expressed or implied by the statements herein due to changes in economic, business, competitive and/or regulatory factors and other risks and uncertainties affecting the operation of Tecnoglass' business. These risks, uncertainties and contingencies are indicated from time-to-time in Tecnoglass' filings with the SEC. The information discussed during the call is presented in light of such risks. Further, investors should keep in mind that Tecnoglass' financial results in any particular period may not be indicative of future results. Tecnoglass is under no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. I will now turn the call over to Jose Manuel, beginning on Slide number 4.

Thank you, Brad, and thank you, everyone for participating on today's call. We are proud to report another outstanding year, marked by strong operational accomplishments and record financial performance across many of our key financial metrics, the relentless dedication of excellence across our businesses. Our innovation domestically integrated business model are all reflected in our solid full year results. During 2023, we produced record total revenues of $833 million, achieving a record adjusted EBITDA of $304 million and produced record gross profit of $391 million. We are pleased to accomplish these results, while maintaining a resilient industry-leading margin profile. We more than doubled our addressable market with our strategic entrance into the High End Vinyl end market. We relocated our global headquarters to Miami, Florida, aligning with over 95% of our revenues sold from key U.S. markets. Our prudent management of working capital allowed us to generate impressive operating cash flow of $139 million for the year. At the same time, we have preserved a strong balance sheet, which provides ample flexibility for future growth and additional returns for shareholders. And finally, we completed our strategic investment to expand operational capacity by 40% to roughly $1.2 billion of revenue, including installing. We have been experiencing healthy multi-family commercial demand, so both high demand from our innovative products and increased commercial activity in our key geographies. This drove an increase in backlog to a record of $870.1 million at the year end. We continue to gain market share in key geographies, despite a challenging macroeconomic environment. We have also taken a disciplined approach to managing costs. We are leveraging our vertical integrated structure, entire (ph) automation investments to drive operational efficiency. This focus is evident in our full year gross margin of approximately 47%. We achieved this despite the previously discussed…

Thank you, Jose Manuel. Moving to Slide number 5. Our fourth quarter results were in line with our expectations and reflect the resilience of our business model as we navigate a turbulent macroeconomic environment. Our results during the quarter demonstrated our ability to leverage our unique competitive advantages to preserve margin strength and generate solid cash flow. Backlog grew each quarter through the year and as of year-end, stood at a record of $870.1 million, reflecting a strong pipeline of multi-family and commercial projects. This represented roughly 1.7 times our LTM, multi-family and commercial revenue. Equally as important, the pipeline activity remains robust, and we continue to see incremental signings year-to-date. Overall, despite the highest interest rate environment, we are levering favorable demographic trends in our markets. We are seeing solid levels of multi-family and commercial quoting and bidding, and we have a strong base of activity that gives us confidence in our ability to achieve another strong year in 2024. We will continue to focus our efforts on adding new customers, entering new markets and providing best-in-class service. While we are growing our backlog, we are being mindful to focus on projects that will allow us to sustain our industry-leading margins. We have an innovative R&D pipeline of high-performance products that should allowed us to continue growing faster than our end markets. Our pipeline includes products developed for both the new geographies we are penetrating as well as products to support our expansion into the vinyl market. The expansion and automation investments made in recent years put us in a position to effectively execute our growth strategy with ample operational capacity and less CapEx requirements. In addition to the strong visibility afforded by our growing backlog, we are excited about the long-term growth potential of our single-family residential business.…

Thank you, Christian. Turning to single-family residential on Slide number 8. During the fourth quarter, we generated single-family residential revenues of $77.1 million compared to $85.1 million in the prior year quarter. The year-over-year change was primarily due to slower sequential and year-over-year activity, resulting from much higher interest rates and mortgage rates. Despite a challenging macroeconomic environment and a year of declines in housing starts, we were pleased to produce record full year 2023 single-family residential revenues of $335.4 million. We continue to see market share upside in single-family residential revenues through a variety of factors. This includes our widening dealer base, enabled by short lead times, new product introductions, geographic expansion throughout Florida, additional showrooms in other markets and our recent entrance into the vinyl market. This provides significant runway for revenue growth and product diversification on a long-term basis. To that point, on Slide number 9, I would like to highlight a few key points from our recent strategic entry into vinyl windows. Our strategic entry into vinyl windows has significantly expanded our addressable market. We were pleased to begin shipments of our innovative vinyl products in December. We are currently working with additional clients and prospects to perform a significant amount of testing and sampling in order to ramp up deliveries throughout 2024. In addition to our showroom expansions, we are excited for what the future holds for Tecnoglass in the vinyl market. We expect these high-end value added vinyl products to contribute more meaningfully to results, particularly in single-family residential after the second quarter of 2024 and beyond. Importantly, we've already completed a significant portion of the anticipated CapEx to enable our facilities and operational infrastructure to accommodate this transformational initiatives. We expect this strategic entrance into the vinyl segment will more than double our…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Sam Darkatsh with Raymond James. Please proceed with your questions.

Good morning, Jose Manuel, Chris, Santiago. How are you?

Good morning.

Good morning, Sam.

How are you?

So I've got three questions, if you forgive me. So first, and you mentioned Santiago, the first quarter sales expected to be flattish with the fourth quarter with the installation element higher. So could you help us in that vein, what you might be pegging for realistic gross margins and EBITDA for the quarter?

Yeah. In gross margin, Sam, I will see something in line with Q4, perhaps. I would expect that over the quarter, being the fact that we're going to have more mix, there's going to be a little bit of a headwind in there. But from an EBITDA perspective, we wanted to wait and see what the cadence of the orders on the residential side are looking like, and then we'll be able to determine that. But it should be kind of in line with Q4 all around from an FX perspective. If you look at what's happened in the last six months, FX has been really stable. The main impact was year-over-year. As you recall, 2022 had a very depreciated peso. But in the last six months, it's been rather stable. So I think from a quarter-over-quarter comparison, the FX pressure is really behind us. So I would expect something more in line with Q4 and then sequentially growing thereafter, as we said on the call, and that's based on what we're expecting from the timing of deliveries and also from the timing of how the vinyl initiative is ramping up. And the other thing is that, as you know, in January, we have a scheduled maintenance where we only had about 20 days -- 20 working days. So that has an impact in there as well, which we did not have in January of last year.

Yeah. Because that's normally in December, right?

Yes, more in December. So this time is going to be a little bit unusual.

Got it. So the gross margin and EBITDA, similar to fourth quarter or just gross margin? I was trying to get a sense of EBITDA also. I'm sorry.

I think EBITDA could be in line or slightly lower based on the mix of revenues. And then, as I was saying, just ramping up throughout the year.

Got it. And then I respect the reticence to talk about EBITDA for the entirety of '24 because of macro uncertainty. But if you just thought that the sales growth would be 10%, which is the low end of your double-digit growth expectations, how should we think about what prospective EBITDA might look like under that scenario?

I would consider two things on that. You're going to get operating leverage on higher sales, but then you're going to have the effect of FX, which for 2023 was at 4,325 (ph) and what we're projecting for 2024 is in line with current conditions, which is 4,000. So you're talking about the peso being stronger by about 8% to 10%. As we discussed earlier, and we alluded on the call this morning, for every 5% movement on FX, you have about 150 basis points of impact to operating margins, right? So at the end of the day, you're going to have operating leverage, helping out with double-digit growth, but then you're going to have the impact of FX for the full year, which we see stable, but then 8% to 10% stronger year-over-year versus 2023. So if you kind of back into it, I think we can -- there's a chance that we can grow EBITDA, but it's going to be probably more in line year-over-year based on mainly FX and mix.

Got it. So we would use a normal -- sorry, you'd use a normal incremental margin on the 10% volume growth and then apply a 300 basis point or so headwind from FX? Is that the way to think about it holistically?

Yeah. And if you look about the guidance or the high-level color that we're giving on gross margins, we ended up at 47%. And if you do kind of the math on gross margins that we're talking about for 2024 and discussing mid-40s gross margins, you already kind of have that effect baked in there, right? I mean you have a 300-basis-point effect on FX, which gets you to about 44%. The difference from then is going to be how much operating leverage can we get, how fast is this residential initiatives going to ramp up. So that's going to be the upside. And obviously, we can get more operating leverage on those higher revenues. But then you kind of offset that with the fact that we're going to have more installation mix. So those are the three variables that are kind of playing a part in there. All-in-all, I think that mid-40s is probably the run rate and the adequate way to project gross margins.

And then my last question, thank you for that Santiago. My last question, lots of price increase announcements from U.S. windows -- single-family window manufacturers and a lot of your competitors of late. Are you anticipating raising prices for single-family resi in line with those announcements or are you looking to keep pricing flattish and maybe pick up some share as a result?

Well, we don't have any plans to increase prices because to the contrary, we have good sources for aluminum and glass. We see no price increases on that end. So our clients are very happy with our price point. And actually, February was better than expected month than August. So we're very happy with where we are right now. We're not going to increase prices, at least not this month or next.

Very helpful. Thank you, gentlemen.

Thanks, Sam.

Thank you. Our next questions come from the line of Stanley Elliott with Stifel. Please proceed with your questions.

Hey. Good morning, everybody. Thank you for the question. On the vinyl initiative, can you talk about how much you're assuming that vinyl would contribute to the double-digit revenue growth you guys are targeting for the year?

Yes. It's basically weighted towards the second half, first of all, because what is taking place right now is the delivery of sampling and testing of the product, so bear that in mind. But we are seeing that contributing more meaningfully in the -- after the second quarter of the year to the range of probably $20 million to $25 million in total orders. Now if it ramps up better than expected, that's where you're going to see the upside come from. But early indicators on feedback and what's going on right now are encouraging, Stan.

Great. And then could you remind us again kind of what you're thinking about from a CapEx perspective for the coming year, now a lot of that heavy lift is done. And then how are you all thinking about maybe accelerating a buyback at this point?

Yeah. That's going to be one of the strongest points for 2024. We see probably the best free cash flow year that the company has ever had. And that's predicated on the fact that we again, are seeing double-digit growth. And CapEx is expected to essentially go down by half, I would say, to the range of $40 million to $45 million. So that's going to give us a lot of flexibility to do many things, including being opportunistic on the buyback. As you know, we still have roughly half of the program available to us. And if we make sense, the free cash flow is going to be there to get another approval, if you make sense. So we'll definitely be opportunistic on that end.

Perfect. And last for me, with kind of a lot of moving parts this year, how should we think about SG&A maybe on a dollar basis or a percent of revenues, however, you want to frame that out, but just to kind of give us some direction there?

Not a whole lot of changes, I would say in there, Stan, other than the adjustments that you have to do on salaries locally, which are to the order of 8%. But other than that, the only moving pieces are on the transportation and commission side, which are the variable expenses related to higher sales. But nothing really out of the ordinary. I wouldn't say flattish, but I would imagine that growing slightly less than revenues. And that's also based on the fact that we have some non-recurring expenses in 2023, which we do not expect in ‘24. So to that extent, I would imagine that we can generate operating leverage on those higher sales.

Perfect. Thanks so much for the color. Appreciate and best of luck.

Yeah. Thanks.

Thank you. [Operator Instructions] Our next questions come from the line of Tim Wojs with Baird. Please proceed with your question.

Hey, guys. Good morning.

Good morning, Tim.

Maybe just on the underlying kind of residential business. I guess, what do you think has kind of changed over the last three to four months? And I think Jose Manuel you said that February was a little bit better. I mean has that business kind of gotten back to growth? I'm just kind of curious as you kind of look at expectations and order rates and things, what have you been hearing from your customers around kind of the underlying residential business?

Well, this residential (ph) business we expect to grow because we are moving upward. We were only selling a lot from, let's say, St. Petersburg, South of Florida. And now, we're moving all the way up to Georgia, Carolina and also Tampa, the Panhandle (ph). So we expect that market to grow. It was installed for three, four months. I mean, not bad, but it wasn't growing because a lot of housing projects were delayed because of the high interest rate. But lately, it seems that the interest rate went down like 1 point, and people are enthusiastic. Like I just said, this month was a very good month for me, February. We're very happy. And I think the trend, I mean we just went to the show in Vegas, and the acceptance of our new products for Northern Florida and outside of Florida has been tremendous, and we're very happy.

Okay. That's good. And then Santiago, just on the cadence of kind of growth through the year, I guess how -- I'm just trying to kind of understand maybe like how we should think about the sequential ramp? Would you kind of expect it to be fairly linear through the year or is there more of a, I guess, second half weighting to kind of some of the sequential improvement at this point?

I would expect sequential improvement each quarter. Typically, you know that Q2 and Q3 are the best out of the year, but that’s again going to depend on how the vinyl initiative and the geographical expansion on the residential side ramp-up. But I would model it – as we were saying, Q1 in line with Q4 is going to be the seasonal low quarter, given the fact that we had almost half a month of January of invoicing, and then ramping up the rest of the year is how we’re modeling this out.

Okay. Very good. Thanks, guys.

All right. Thanks.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr. Jose Manuel Daes for closing remarks.

Okay. Thanks everyone for participating on today's call. We expect to keep giving good news to our investors, and I think this next two, three years are going to be fabulous for the company. Thank you.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.